With some creative packing, it is extraordinary what one can jam into a single grocery bag. Two decades ago, America had three major national supermarket chains. Soon that trio could become one.
On Friday, Kroger announced that it would acquire Albertsons at an aggregate value of $25bn. Albertsons had already consumed Safeway seven years ago. The combined group will have 5,000 stores and more than $200bn in annual revenue.
The grocery business has traditionally reported skinny operating margins of 5 per cent at best. The entry of Amazon, Costco and Walmart exacerbated the cut-throat competition. A combination of Kroger, Albertsons and Safeway may pass regulatory scrutiny because of this encroachment by general retailers and the success of ecommerce.
Kroger already has a plan to lighten its load when competition authorities review the deal. It has committed to create a new listed company, holding between 100 and 375 stores, with existing Albertsons shareholders getting shares in this spin-off. Kroger may divest other stores for cash as well. The SpinCo is a tax and time-efficient way to satisfy antitrust regulators keen to reduce any of Kroger’s regional market concentration.
How well such a diminutive chain is received by the public market remains to be seen. But the mooted valuation ascribed by Albertsons and Kroger — three times ebitda from stores alone — is reasonable. While awaiting the regulatory review, Albertsons shareholders will be paid a fifth of the deal price in a special dividend as compensation.
Despite the brutal economics, private equity has minted fortunes in the grocery business. KKR’s controversial 1986 buyout of Safeway eventually netted that firm $7bn in deal profits. Albertsons’ largest shareholders today are Cerberus and a series of property investors who first invested in the chain in 2005 and will crystallise billions in profits themselves. The shelf life of US grocery deals can be a long one.
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